Australia: Better days ahead for building owners in NSW strata schemes

With a quarter of Sydney's Metropolitan residents now living in Strata titled properties1, the increase in high rise residential developments shows few signs of abating. New legislation, coming into effect at the end of this year, will give these owners greater protection and developers may need to consider changes in the way they do business.

The Strata Schemes Management Act 2015 (the Act) will come into operation across New South Wales in November 2016 and draft regulations are currently being circulated by NSW Fair Trading for comments2. This should offer better protection for owners of residential building apartments3. In particular, it addresses a constant bugbear - the defects in these developments.

There has been particular concern recently for the rights of owners' corporations and purchasers in pursuing defect rectification following the High Court's decision in the case of Brookfield Multiplex v Owners Corporation Strata Plan 61288 [2014] HCA 36 (the Brookfield Multiplex Case). The Brookfield Multiplex Case provides that the law will not step in to assist purchasers in respect of latent defects where parties had an agreement articulating the builder's obligations to remedy defects. Owners' corporations (and purchasers of apartments) will either be limited to relying on their contractual protections, or the introduction of legislative reform4.

The Act may have a significant impact upon developers5 with the introduction of a new defect bond and inspection regime, designed to reduce the incidence of drawn-out disputes for defect rectification. This new regime, however, will only apply to construction contracts entered into after the commencement of the legislation and won't apply retrospectively.

SIGNIFICANT CHANGES FROM A DEVELOPMENT POINT OF VIEW

  • Developers must now appoint a qualified building inspector to inspect and provide an interim and final report on the building work6.
  • Prior to completion of the building work, developers must provide a building bond (paid into a fund established by the Department of Fair Trading) equal to 2% of the contract price for the purpose of securing payment for rectifying any defective building work identified in the final report7.
  • On the later of two years after the completion of the building work, or within 60 days after the final report is given to the developer, the bond will be either drawn down in favour of the owners' corporation if the final report identifies and estimates the costs of the defective work, or returned to the developer (or the balance of the bond) if there is no defective work identified.
  • The maturity date for a building bond must not be more than three years8.
  • Importantly, an occupation certificate (as issued under the Environmental Planning and Assessment Act 1979) for any part of the building for which the building work was done will not be issued until the building bond is provided by the Developer, which may impact on the Developer completing its contracts for sale9.

Clearly, the NSW Government is attempting to address the need for additional statutory protection for purchasers or unit holders by increasing accountability for developers. The new legislation supplements the statutory warranties provided by the Home Building Act 1989 (NSW) (Home Building Act) and in particular, "multi-storey"10 developments11. Under the Home Building Act, owners have a period of six years to claim for any 'major defects'. Claims for defects causing physical damage, which fall short of this definition, need to be brought within two years12.

IMPLICATIONS FOR DEVELOPERS

So how will the draft legislation impact upon developers? It really depends on the way their organisation is structured. Those developers with in-house construction capabilities will have different considerations and may seek to allocate risk differently compared to those who contract with third party builders.

Those contracting with third party builders will seek to extend the defects liability periods until the issue of the final report (which will occur after the two year period), and require builders to provide additional security to cover the 2% defects bond.

Developers with in-house construction subsidiaries may not wish to change their current approaches and risk allocation with their related builder entity. These organisations could seek to pass this added cost on to the individual purchasers of the strata units.

How effective the reforms will be at addressing the issue of post-completion defect rectification remains to be seen. There are obvious practical considerations for all parties to negotiate; will bonds for 2% of the value of the contract sum really be adequate to cover the costs of rectifying all defects? Debateable.

In light of the Brookfield Multiplex Case, or any legislative reform, there is a prudent path. Developers and builders, as well as owners corporations and purchasers should ensure that the terms of the agreement between the parties are clearly set out in the contracts they enter into.

Footnotes

1 See rolling annual total for high rise residential building approvals chart – Business Insider Australia, "The RBA's warning on Australia's apartment boom', 16 October 2015, David Scutt.

2 Comments on the draft Strata Schemes Management Regulation 2016 may be lodged by way of email to < strataconsultation@finance.nsw.gov.au >.

3 Ibid. 2.

4 See ' The rise and fall of a builder's duty of care to owners corporations' 10 October 2014 by Anna Ross and Kate Gill-Herdman.

The High Court's reasoning for its decision that the builder did not owe the duty of care alleged by the owners corporation for economic loss caused by latent defects was based on the special circumstances necessary to establish the existence of such a duty of care and the need to establish a certain level of 'vulnerability'. It held that the individual owners of the units purchased (together, forming the owners corporation) were not 'vulnerable' to the required threshold to the economic loss caused by the construction by the builder. The individual owners were in a position to protect themselves contractually when entering into the agreements with the developer, and could have 'exercised [their] contractual wisdom to bargain for protection against the risk of defects'4.

5 The term 'developer' in the Act has the same meaning given to it in the Home Building Act 1989 (NSW).

6 Under Part 11 of the Act, developers now must:

  • within 12 to 18 months of completion of the building work and with the approval of the owners' corporation, appoint a qualified building inspector (not connected with the developer or the building work) to inspect and report on the building work (interim report); and
  • if defective building work is identified, within 18 months to 2 years of completion of the building work, arrange for that inspector to carry out a final inspection and provide a final report (final report).

The developer will be responsible for all costs associated with obtaining inspections and reports, and for the purposes of section 210 of the Act, the building bond may be used to meet the costs of an inspection or a report, including any fee for the appointment of a building inspector by the Secretary (if the developer of the Strata scheme is bankrupt or insolvent and the costs of any fee have not been paid). See section 54 of the draft Strata Schemes Management Regulation 2016.

Matters to be specified in the interim report and final report are contained in sections 47 and 48 of the draft Strata Schemes Management Regulation 2016.

7 The building bond will be payable irrespective of whether the building work is held to breach the statutory warranties under Part 2C of the Home Building Act, or whether the developer is liable to the owners' corporation or any owner of a lot in respect of that work.

A developer may be subject to a fine of up to $22,000 if it fails to provide the building bond prior to completion of the building work, and an occupation certificate will not be issued until and unless the building bond has been provided (Division 3, Part 11).

8 See section 51 of the draft Strata Schemes Management Regulation 2016.

9 See section 207 of the Act.

10 High rise residential buildings which have a rise of more than three storeys and contains two or more separate dwellings.

11 There is a general exemption for construction of new multi-storey residential building, which do not require insurance cover under the Home Building Compensation Fund. See Home Building Compensation Fund Fact Sheet published May 2016 by NSW Fair Trading and Division 6 Exemptions relating to insurance, section 56 of Home Building Regulation 2014..

12 See section 18E of the Home Building Act.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Chambers Asia Pacific Awards 2016 Winner – Australia
Client Service Award
Employer of Choice for Gender Equality (WGEA)

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.